Last week, I warned you that volatility in financial markets would rise further and reach crescendo levels that retail traders are not geared to handle. Sure enough, the markets gyrated wildly with larger-than-normal price swings. The expectations of a mean-reversion upmove and empirical evidence of a shorter trading week favouring bulls also played out as expected. News of a ceasefire and hopes of the end of the war in Iran lifted sentiments to euphoric levels. A bear squeeze (when bears/short sellers are forced to close their short sales due to rising losses) accelerated the rally. These are times when bulls buy, given their bullish nature. And bears are buying due to panic over short-selling losses rising faster than traders can handle and provide for.
Such times when both bulls and bears are aligned in the same direction are called “dual pressure” events. Price moves are invariably larger than average, and volatility is extremely high as emotions dominate sentiments. And emotions are anything but rational. Which is why I still categorise last week's rally as a relief rally rather than a complete trend reversal. Bear market rallies and bull market corrections are counter-trend events (when prices move temporarily against the larger trend). Not only do they catch traders by surprise, but they also mislead traders into believing that the tide has turned. Everybody loves a bull market, but I suggest we wait for some more tick marks on our bullish checklist before going long aggressively in our short-term trades.
I have been advocating in this column that banking is the swing sector, capable of making markets pivot on short notice. That hypothesis was validated last week as the rally was led by the banking and finance sector. This sector commands a 35.45% weightage in the market and warrants careful watching.
In the commodities space, oil and gas remain susceptible to news-flow on the war front. I expect prices to ease (with a notable lag) if the war were to end in Iran. In the near term, oil is likely to remain volatile but will witness resistance at higher levels.
Bullion witnessed buying on declines, as expected. I maintain my long-standing view that only the short-term outlook is muddied. The long-term outlook remains positive for the patient delivery investor. As long as my readers do not leverage (buy on borrowed money) they should be doing fine. Remember the old wisdom – you cannot have a baby in a month by getting nine women pregnant. Bullion investing is for the patient player.
Base (industrial) metals may witness some upside due to supply-side disruptions rather than actual ore shortages. Copper (also known as Dr Copper) is a benchmark industrial metal as it is used in almost all industries. The shortage of sulphuric acid and China's ban on its exports from May 2026 could hit copper production. That can push copper prices higher and pull other non-ferrous metals along. That means the stock prices of metal mining companies can find buying support in the event of declines.
This week is also shorter due to Babasaheb Ambedkar Jayanti. This may benefit bulls, as historical evidence suggests short trading weeks tend to trigger upsides.
Volatility can remain elevated and that means stop losses and tail-risk (Hacienda) hedges must be maintained as standard operating procedure. A tutorial video on tail risk (Hacienda) hedges is here.
Fixed-income investors should remain cautious as interest rates are likely to firm over the coming months.
Rear-view mirror
Let us assess what happened last week so we can guesstimate what to expect in the coming week.
The rally was led by the Bank Nifty, and the Nifty 50 brought up the rear. Safe-haven buying continued in bullion as the US dollar index (DXY) slipped. That benefited emerging markets (including India) as their markets rallied.
Oil and gas eased on the news of a ceasefire. Higher levels continued to witness profit-taking. The rupee gained against the dollar, boosting sentiment. Indian 10-year sovereign bond yields softened, boosting banking stocks. The National Stock Exchange (NSE) saw a 6.86% rise in market capitalisation, indicating broad-based buying support.
Market-wide position limits (MWPL) rose routinely after monthly expiry. US headline indices rallied uniformly and provided tailwinds to bulls.
Retail risk appetite
I use a simple yet highly accurate yardstick to measure the conviction levels of retail traders—where they are deploying their money. I measure the percentage of turnover contributed by the lower- and higher-risk instruments.
If they trade more of futures, which require sizable capital, their risk appetite is higher. In the futures space, index futures are less volatile than stock futures. A higher footprint in stock futures shows higher aggression levels. Ditto for stock and index options.
Last week, this is what their footprint looked like (the numbers are the average of all trading days of the week) –
Turnover contribution fell in the high volatility, capital-intensive futures segment. That indicates nervousness in the bull camp.
In the relatively less volatile, lower capital-intensive options segment, turnover contribution rose for the least risky index options in the derivatives space. That tells me the bulls are hesitant. Unless aggressive buying resumes, any upmove remains a pullback rally.
Matryoshka analysis
Let us peel layer after layer of statistical data to arrive at the core message of the markets.
The first chart I share is the NSE advance-decline ratio. After the price itself, this indicator is the fastest (leading) indicator of which way the winds are blowing. This simple yet accurate indicator computes the ratio of rising to falling stocks. As long as the number of gaining stocks outnumber the losers, bulls are dominant. This metric is a gauge of the risk appetite of one marshmallow traders. These are pure intraday traders.
The Nifty 50 logged sizable gains, and the advance-decline ratio replicated those gains. At 3.73 (prior week 3.13), there were 373 gaining stocks for every 100 losers. This ratio is statistically difficult to sustain. As long as the ratio stays above 1.0 with rising prices, bulls will remain in control. Watch this metric keenly on your trading terminal screen all week.
A tutorial video on the Marshmallow theory in trading is here.
The second chart I share is the market-wide position limits (MWPL). This measures the amount of exposure utilised by traders in the derivatives (F&O) space as a component of the total exposure allowed by the regulator. This metric is a gauge of the risk appetite of two marshmallow traders. These are deep-pocketed, high-conviction traders who roll over their trades to the next session (s).
The MWPL reading rose to 45.57 (prior week: 39.88), which is along routine lines post-monthly expiry. However, the absolute number remains subdued, which tells me swing traders were still cautious about increasing their exposure in the leveraged space.
A dedicated tutorial video on how to interpret MWPL data in more ways than one is available here.
The third chart I share is my in-house indicator ‘impetus.’ It measures the force in any price move. Last week, the impetus readings for both indices rose significantly, driven by sharp price advances. That means the rally was on higher momentum. Follow-up buying needs to be seen to sustain the upthrust.
The final chart I share is my in-house indicator ‘LWTD.’ It computes lift, weight, thrust and drag encountered by any security. These are four forces any powered aircraft faces in flight, so applying them to traded securities helps a trader estimate prevailing sentiment.
The Nifty clocked spectacular gains, and LWTD followed suit at 0.28 (prior week: -0.08), suggesting fresh buying support may emerge on declines, barring unforeseen circumstances.
Nifty’s verdict
Last week, we saw a powerful bullish candle, which is the largest one in the enclosed weekly chart. I had suggested for a fortnight that the wide gap between the 25-week moving average and the price line indicated a possible mean reversion rally. I reaffirmed it last week after we saw a small bullish candle in the prior week.
The 24,400 hurdle I advocated for a fortnight remains in place as a resistance level. I still want to see this hurdle crossed on a sustained closing basis before betting on aggressive, fresh short-term long trades. On the flip side, a sustained trade below 23,200 levels may open the possibility of a fresh decline. That probability appears to be low at the time of writing this piece.
Your call to action
Sustained trade above the 24,400 level indicates the possibility of a fresh rally. Only if this level is overcome confidently can a new bullish phase begin. A sustained trade below the 23,200 level can trigger fresh weakness.
Last week, I estimated ranges of 53,550–49,550 and 23,500–21,900 for the Bank Nifty and Nifty, respectively. Both indices exceeded their specified resistance level by a sizeable margin on news of the ceasefire.
This week, I estimate ranges of 58,425–53,400 and 25,000–23,100 for the Bank Nifty and Nifty, respectively. The wide projected range is due to the large base effect of the previous weeks' usually wide range.
Trade light with strict stop losses. Avoid trading counters with spreads wider than 8 ticks. Have a profitable week.
Vijay L. Bhambwani has been trading in the markets since 1986 and is the CEO of www.bsplindia.com, a proprietary trading firm. He tweets at @vijaybhambwani.